Union Budget : Key Terms

Union Budget Key terms you should know

Union Budget: Union Budget is the most comprehensive report of the Government's finances in which revenues from all sources and outlays for all activities are consolidated. The Budget also contains estimates of the Government's accounts for the next fiscal year called Budgeted Estimates.

Interim Budget: In India, an Interim Budget is presented only if the government does not have the time to present a full budget or because the General Lok Sabha elections may be close.

Annual Financial Statement (AFS): Article 112 of the Constitution requires the government to present to Parliament a statement of estimated receipts and expenditure in respect of every financial year, from April 1 to March 31. This statement is called the annual financial statement.

It is divided into three parts, Consolidated Fund, Contingency Fund and Public Account. For each of these funds, the government has to present a statement of receipts and expenditure.

• Consolidated Fund of India: One of the essential government accounts, the consolidated fund of India, comprises all the revenues received and expenses incurred by the government. The majority of the government expenses are met through this fund, except some are met through the contingency fund. Withdrawals from this fund require parliamentary approval.

• Contingency Fund of India: As the name suggests, contingency funds caters to national emergencies. The fund is at the President of India's disposal and is used in times of crisis. The Union Government has a contingency fund of Rs. 500 crores.

• Public Account: Under provisions of Article 266(1) of the Constitution of India, Public Account is used in relation to all the fund flows where Government is acting as a banker. Examples include Provident Funds and Small Savings. This money does not belong to the government but is to be returned to the depositors. The expenditure from this fund need not be approved by the Parliament.

Medium-term expenditure framework (MTEF): The medium-term expenditure framework (MTEF) statement sets a three-year rolling target for expenditure indicators, along with specifications of underpinning assumptions and risks. This statement is presented in Parliament under Section 3 of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.

Types of Bill Present in Union Budget

Appropriation Bill: An appropriation bill is a proposed law that authorizes the expenditure of government funds. It is also known as a supply bill or spending bill. This Bill gives power to the government to withdraw funds to meet the expenditure during the financial year. The funds are withdrawn from the Consolidated Fund of India..

Finance Bill: The Bill produced immediately after the presentation of the Union Budget detailing the Imposition, abolition, alteration or regulation of taxes proposed in the Budge. It is presented at the time of presentation of the Annual Financial Statement in fulfilment of the requirement of Article 110 (1)(a) of the Constitution.

• The proposals of the government for levy of new taxes, modification of the existing tax structure or continuance of the existing tax structure beyond the period approved by Parliament are submitted through the Finance Bill. 

Budget estimates: Budget estimates refer to the amount of money allotted to various ministries or schemes in a financial year.

Revised estimates: A mid-year review is conducted to assess possible revisions to be made to the expenditures, considering any new spending, services, and instruments of services, etc. There is no voting on revised estimates by the Parliament. 

• Any revised/additional projections in the revised estimates have to be authorized for spending by the Parliament or by a reappropriation order.

Re-appropriations: Re-appropriations allow the Government to re-appropriate provisions from one sub-head to another within the same Grant. Re-appropriation provisions may be sanctioned by a competent authority at any time before the close of the financial year to which such grant or appropriation relates. 

• The Comptroller & Auditor General and the Public Accounts Committee reviews these re-appropriations and comments on them for taking corrective actions

Outcome Budget: Every ministry submits a preliminary outcome budget to the finance ministry, which then compiles them. This practice began from the fiscal year 2006-07. The outcome budget, essentially, is a progress report detailing what the ministries did with the funds allotted to them in the previous budget.

Guillotine: Parliament, unfortunately, has very limited time for scrutinising the expenditure demands of all the Ministries. So, once the prescribed period for the discussion on Demands for Grants is over, the Speaker of Lok Sabha puts all the outstanding Demands for Grants, Whether discussed or not, to the vote of the House. This process is popularly known as 'Guillotine'.

Cut Motions: Motions for reduction to various Demands for Grants are made in the Form of Cut Motions seeking to reduce the sums sought by Government on grounds of economy or difference of opinion on matters of policy or just in order to voice a grievance.

Vote on Account: Article 116 of the Indian Constitution defines vote on account as the interim advance grant given to the central government as part of a financial year budget. This is an estimated expenditure, pending the finalisation of the Demand for Grants and the passing of the Appropriation Act.

Demands for Grants (DG): It is a kind of form that is submitted in pursuance of Article 113 of the Constitution. 

Capital Budget: The capital budget is the budget of capital receipts and capital payments. Investments in shares, loans, and advances granted by the central and state governments, government companies, corporations, and other parties are included.

Capital Expenditure: The expenditure over creating fixed assets such as highways, buildings etc. and the loans given to states by the central government. 

Revenue Expenditure: The expenditure for the daily business operations such as subsidies & are not used exclusively to build an asset.

Revenue Budget: The revenue budget is the budget of revenue receipts and revenue expenditure. Revenue receipts are further classified into tax and non-tax revenue. Revenues from taxes include taxes like income tax, corporate taxes, excise, customs, GST, and other government levies of duties and taxes. Interest on loans and dividend on investments constitute the non-tax revenues.

Non-plan expenditure: Non-plan revenue expenditure is accounted for interest payments, subsidies (mainly on food and fertilisers), wage and salary payments to government employees, grants to States and UTs governments, pensions, police, economic services in various sectors, other general services such as tax collection, social services, and grants to foreign governments.

Plan Expenditure: Plan expenditures are estimated after discussions between each of the ministries concerned and the Planning Commission. Plan expenditure forms a sizeable proportion of the total expenditure of the Central government.

Non-tax revenue: The most important receipts under this head are interest payments (received on loans given by the government to states, railways and others) and dividends and profits received from public sector companies.

• Various services provided by the government - police and defence, social and community services such as medical services, and economic services such as power and railways - also yield revenue for the government.

• Though Railways are a separate department, all its receipts and expenditure are routed through the consolidated fund.

Grants-in-aid and contributions : The third receipt item in the revenue account is relatively small grants-in-aid and contributions. These are in the nature of pure transfers to the government without any repayment obligation.

Tax revenue: The primary source of income gained by the government through taxation. This includes both direct and indirect taxes.   

Excess Grant: If the total expenditure exceeds the original allocated grant & supplementary grant expenditure, the excess is required to be approved in the form of Excess Grant from the parliament.

Direct Taxes:  These are taxes that are paid directly to the government by individuals and corporations. These taxes include corporate tax, income tax, personal property tax, real property tax, etc. 

Indirect Taxes: These taxes are paid by consumers when they purchase goods and services. Examples of indirect taxes include excise tax, and GST.

Corporate Tax: This is the tax paid by corporations or firms on the incomes they earn.

Minimum Alternative Tax (MAT): The Minimum Alternative Tax is a minimum tax that a company must pay, even if it is under zero tax limits.

Customs Duty: These are levies charged when goods are imported into, or exported from, the country, and they are paid by the importer or exporter. Usually, these are also passed on to the consumer.

Fringe benefit tax (FBT): The taxation of perquisites - or fringe benefits - provided by an employer to his employees, in addition to the cash salary or wages paid, is fringe benefit tax. It was introduced in Budget 2005-06. The government felt many companies were disguising perquisites such as club facilities as ordinary business expenses, which escaped taxation altogether. Employers have to now pay FBT on a percentage of the expense incurred on such perquisites.

Securities transaction tax (STT): Sale of any asset (shares, property) results in loss or profit. Depending on the time the asset is held, such profits and losses are categorized as long-term or short-term capital gain/loss. 

• In Budget 2004-05, the government abolished long-term capital gains tax on shares (tax on profits made on sale of shares held for more than a year) and replaced it with STT. It is a kind of turnover tax where the investor has to pay a small tax on the total consideration paid / received in a share transaction.

Banking cash transaction tax (BCTT): Introduced in Budget 2005-06, BCTT is a small tax on cash withdrawal from bank exceeding a particular amount in a single day. The basic idea is to curb the black economy and generate a record of big cash transactions.

Sin Tax: A sin tax is imposed on goods and services, which are perceived as harmful to society. Examples of products on which sin tax is imposed are: tobacco, gambling ventures, alcohol, cigarettes, etc.

Short-term capital gain tax (STCG): Short-term capital gain tax (STCG) is a tax levied on capital gains from the sale of an asset held for a short period.

• What are capital gains: The gains or profits from sale of capital assets are classified as capital gains. The most common examples of capital assets are land, building, house property, gold, trademarks, equity shares, patents, leasehold rights, machinery, etc. If a capital asset is sold within government-defined short-term holding period, gains from it are known as short-term capital gains.

• The short-term holding period differs for various items. For security assets like shares listed on stock exchange, debentures, mutual funds, and government securities, the holding period is up to 12 months. For other immovable assets, such as land, property, the period is up to 24 months.

Long Term Capital Gains Tax: Basically, it is the 'gain' made on 'capital investment'. In some tax jurisdictions — a country, state or city — capital gains are taxed if an individual sells an asset after holding it for a certain 'long' period. This period is often twelve months. However, it could also be defined differently for various assets. 

• In India, 'long-term' and 'short-term' are defined by the Income Tax Act, 1961. While a holding period of one year is considered 'long-term' for equities, the same is two years for real estate. 

• The Union Budget 2018 proposed to levy long-term capital gains tax (LTCG) of 10 per cent on gains exceeding Rs 100,000 from sale of equity shares. However, no change was made in the definition of short-term capital gains tax (STCG).

Cess: This is an additional levy on the basic tax liability. Governments resort to cess for meeting specific expenditure. For instance, both corporate and individual income is at present subject to an education cess of 2%. 

• In the last Budget, the government had imposed another 1% cess - secondary and higher education cess on income tax - to finance secondary and higher education.

Countervailing Duties (CVD): Countervailing duty is a tax imposed on imports, over and above the basic import duty. CVD is at par with the excise duty paid by the domestic manufacturers of similar goods. This ensures a level playing field between imported goods and locally-produced ones. 

• An exemption from CVD places the domestic industry at disadvantage and over long run discourages investments in affected sectors.

Export Duties: This is a tax levied on exports. In most instances, the object is not revenue , but to discourage exports of certain items. 

• In the last Budget, for instance , the government imposed an export duty of Rs 300 per metric tonne on export of iron ores and concentrates and Rs 2,000 per metric tonne on export of chrome ores and concentrates.

Surcharge: As the name suggests, this is an additional charge or tax. A surcharge of 10% on a tax rate of 30% effectively raises the combined tax burden to 33%. In the case of individuals earning a taxable salary of more than Rs 10 lakh a surcharge of 10% is levied on income in excess of Rs 10 lakh. Corporate income is levied a flat surcharge of 10% in the case of domestic companies and 2.5% for foreign companies. Companies with revenue less than Rs 1 crore do not have to pay this surcharge.

Dividend Distribution Tax (DDT): Dividend Distribution Tax (DDT) is a tax levied on dividends distributed by companies out of their profits among their shareholders.

• The Dividend Distribution Tax is taxable at source and is deducted at the time of the distribution. According to the law, DDT is levied at the hands of the firm, and the shareholder. An exception is that when a shareholder receives more than Rs 10 lakh in dividend, they have to pay an additional tax.

Various Types Budget Deficit 

Fiscal Deficit: A fiscal deficit is when the country's unborrowed receipts fail to compensate for its entire expenditure, and the country has to borrow funds from the citizens to meet the shortfall. 

• Fiscal deficit = Total Expenditure – Total Unborrowed Receipts

Revenue Deficit: Revenue deficit refers to the difference between the revenue receipts and revenue expenditures. Revenue deficit is when the government's current income falls short of the government's current spending.

• Revenue deficit = current revenue expenditure – current revenue receipts

Primary Deficit: The primary deficit is when the interest payments are subtracted from the fiscal deficit. Primary deficit indicates how much of the government's spending comprises the total expenditure other than the borrowings.

• Primary deficit = Fiscal Deficit – Interest Payments

Deficit Financing In India

Disinvestment: By disinvestment, we mean the sale of shares of public sector undertakings by the Government. The shares of government companies held by the government are earning assets at the disposal of the Government. If these shares are sold to get cash, then earning assets are converted into cash, So it is referred to as disinvestment.